Can the election affect interest rates?
Once the Fed cut interest rates in Sept 2024, opinions started flying. A good amount of it was thoughtful and informative, but not all of it. For example, I immediately saw a helping of articles claiming that rates were only cut because of the upcoming election. The thought went something like this: “They cut the rates to make the Democratic Party look good before the election. As soon as the election is over, rates will increase again.”
And to that I say, “Bologna!” (What an odd way to spell that word)
Whenever we have an election coming up, people are going to use it as a reason for nearly everything that happens. In this case, I don’t believe the election had anything to do with the rate change. I’ll explain why.
1) The Fed has always had a standard of reviewing inflation data and employment data in deciding changes on interest rates. They like the numbers to be at a certain goal. For example, they like inflation to be about 2%. For the entire year of 2024, neither set of numbers has been where they said they wanted it. The most recent inflation numbers released early in September showed that inflation was just above 2% in the month of August. It had been trending in that direction, but it finally hit in August. I don’t have the info on unemployment numbers, so I can’t comment on that. However, since inflation was where they liked it, they made a move.
2) If the assumption is that the Democratic Party would benefit from a rate cut, then it would have made more sense to cut it earlier in the year. Then, they could point to potentially favorable economic numbers over a longer period of time and say, “See? That’s us!” Since the rate cut didn’t happen prior to September, I can’t believe that a rate cut now would have made any difference for that party. At this point, either party can say they played a part. Democrats could say it was their strong economic policy that did it, and the Republicans could say that constant pressure applied by them made the difference(and because of that, elect us and we’ll keep it coming!).
3) While I appreciate a good conspiracy theory(Bigfoot is partying with Nessy right now), I’m not quick to jump on the bandwagon until I see evidence. Chances are, if someone claims this example as being influenced by the election, then that person probably claims everything is because of the election. That’s not a good mental state to be in.
4) I had one person make the case to me that the “big banks” are in with the deep state and made the rates go down. I responded to that claim with some Banking 101 knowledge: banks benefit MORE from higher rates than lower rates. So, why would they want rates to drop? The higher rates are, the more money banks make on the loans they approve. It’s counter-productive for them to try and influence a rate drop. Remember the big LIBOR scandal from a few years back? All the banks involved in that were keeping rates higher than they needed to be, not lower.
This is the first article I’ve written about finances as they relate to the election of 2024, but I suspect I’ll write a few more because I hear a lot of noise around it. I think it’s important for people to realize that not everything is influenced by the election. Just because something coincidentally changes right before the election doesn’t mean that it had everything to do with the election. I hope this article helped to clarify my stance that the Fed only made a move after they said they would. They review data and make decisions based on the data. Everything isn’t a conspiracy.